Transcript Principles of Economics

Principles Of Economics
Power Point Presentation
Chapter 16
History of International Trade
©J. Patrick Gunning
November 13, 2007
Introduction: World Trade Since 1850
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The modern era of international trade began in
the 19th century, especially during the second
half.
Trade as a percent of GDP quadrupled between
1850 and 1913.
Growth was interrupted and disrupted by two
world wars and the great depression of the 1930s.
Over the two centuries, world trade has grown
from about 5 per cent of global GDP to about 40
per cent.
The Two Eras Of World Trade Growth
(Figure 12-1)
A Corresponding Growth in
Per Capita GDP
What Causes What?
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Did the increase in global trade cause an increase
in global GDP per capita?
Or did the increase in global GDP per capita
cause an increase in global trade?
Remember that global trade rose as a per cent of
GDP.
So it seems reasonable, as a first approximation
at least, to suggest that the increase in trade
played a part in global GDP per capita growth.
Plan of the Chapter
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Purpose: To present a brief history of world
trade.
Three parts:
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1. Ancient and pre-modern trade.
2. The first golden age of international trade.
3. The second golden age of international trade.
New Topic: Ancient and
Pre-modern Trade
Ancient and Pre-Modern Trade (1)
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International trade began before the modern
nation state.
Characteristics of trade prior to the 15th
century:
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Large distances between markets.
High transport costs.
Absence of a commonly accepted money (so much
of the international trade was barter trade.
Trade was not significant by modern standards.
Ancient and Pre-Modern Trade (2)
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Major trade routes were the Caravan Routes of the
Middle East and Africa and the Silk Road stretching
from the Middle East to China (see maps).
The major traders were the Persians (today’s
Iranians) and Arabs. Trade was over land largely by
caravan, with goods carried on the backs of animals.
During the first half of the second millennium, 10001500, Europe was behind China and the Arab
empires in technology, human capital, and trade.
The Silk Road (Figure 16-2)
The Silk Road (2)
Trade and Waterways
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The major seafaring traders of the premodern era were:
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1. Jewish Arabs who had settled in the
towns of Northern Africa.
2. Italians from Genoa and Venice in the
14th and 15th centuries.
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Trade in the Mediterranean
(Figure 16-3)
Institutions in Italian Port Cities
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The growth of international seafaring trade was
accompanied by the growth of institutions in Genoa and
Venice that supported trade.
1. Mints for gold and silver coins
2. Banks to pool the funds of savers and to guarantee
loans.
3. Merchant law to adjudicate trade disputes and to
punish defrauders.
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Birth of private property rights in medieval Europe.
Beginning of free enterprise in medieval Europe.
4. Development of insurance.
Shift from Italy to European Cities
with Ports on the Atlantic Ocean
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As shipping technology improved, the Mediterranean
port cities were replaced in importance by cities with
easy access to the Atlantic ocean: London, Paris,
Lisbon, Amsterdam, and Barcelona.
As Italy faded, the Atlantic sea-faring nations of Spain,
Portugal, England, the Netherlands, and France
emerged as the most powerful nation-states of
Europe.
From these cities, merchants set out for the Americas,
Africa, India, and even East Asia and the South
Pacific.
Trade In The Mediterranean Was
Limited
Trade In The North And Central
Atlantic Came To Dominate
Mediterranean Trade
Trade From Around 1500
To Around 1850 (1)
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Atlantic trade gradually came to dwarf
Mediterranean trade.
The new Atlantic port cities followed the Italian
cities by expanding their banking facilities. They
also adopted a gold or silver-based currency,
merchant law, greater private property rights,
and greater free enterprise.
Ultimately, the rise of the middle class
challenged the power of kings and helped lead
to democratic thinking and, ultimately, to
democracy.
North Atlantic Gyre (Figure 16-4)
Trade From Around 1500
To Around 1850 (2)
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Triangle trade originating in England: “Ships from English
ports carried metal, glass and textile manufactures to west
Africa, helped along by the northeast trade[wind]s; slaves
from Africa to the West Indies and North America, pushed
along by the general westward drift of the equatorial currents;
sugar, rum, cotton, rice, indigo, tobacco from the West Indies
and the Carolinas and Virginia, speeded on by the Gulf
Stream; then flour and timber from New England back to
England, propelled by prevailing westerlies and the North
Atlantic Drift” (Couper, 1972, p.50 and Fig. 1. p.53, as
reported in Fleming, p.8).
Satellite Wind Photo
Trade From Around 1500
To Around 1850 (3)
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Prior to 1850, the security of shipping lanes
depended on the strength of a particular
government’s navy.
Some governments employed privateers, who
were basically government-sanctioned
robbers.
(New London and Groton privateers)

http://www.billmemorial.org/griswold.htm
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Trade From Around 1500
To Around 1850 (4)
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Transoceanic trade was hindered by:
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High transport costs.
Inadequate finance and insurance.
Risks of predation by privateers or pirates.
Fear of natural peril.
An agreement to end privateering and to track down
pirates was made among the major countries in
1856. (Reducing piracy was made easier by the
emergence of steam-power ships.
Note on U.S.
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The U.S. refused to join, claiming that such an
agreement would discriminate against smaller
powers.
But when faced with confederate privateers in
1861, the Union government of the U.S. begged
to join.
England and France agreed but would not permit
the agreement to go into effect until after the Civil
War (Lowe).
Factors That Led to Economic Growth
in the 19th Century
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1. An international agreement on
privateering and piracy.
2. Improved shipping technology.
3. Improved communication.
4. The international gold standard.
Golden Age Of Maritime
International Trade
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By 1913 trade had expanded to twenty times its
level in 1800.
There was a fundamental international division of
labor that had not been seen before on such a
scale.
Steam power and the telegraph linked markets in
different countries.
http://www.pbs.org/wgbh/amex/cable/index.html
http://www.atlanticcable.com/Article/1858Leslies/index.htm
Price Convergence
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Before 1800, the average prices of commodities
in importing countries were as high as 20 times
those in exporting countries. Why? High transport
cost, accident risk, piracy, etc.
After 1815, the price differentials, on average, fell
to 2 or 3 times as high.
By 1900, the price differentials had fallen to 2
times, on average.
The Great Retreat In Trade
From 1913 To 1945
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World War I: 1913 – 1919.
The Great Depression: 1929 – 1935.
World War II: 1939 – 1945.
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International trade was severely disrupted.
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Contraction in World Trade (1929-33)
Protectionism
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Protectionism: an ideology that views international
trade as threatening to a nation and that promotes
the adoption of protectionist policies – i.e., policies
that restrict trade.
Ways of restricting trade in material goods or
resources:
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1. Tariff: either a specific tax per unit of the good (a per
unit tariff) or a fixed percent of its price (ad valorem tariff).
2. Quota: a limit on the amount of a particular good that
can be imported during a given period of time.
3. Quality standards.
Use of Quality Standards
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Quality standards are often used to assure
safety. Examples: imported foods and
medicines; children’s toys.
They may also be used to discriminate:
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1. Discriminatory standards may be applied to
imports.
2. Discriminatory inspections.
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The potential for bribery and corruption.
New Topic: The Second Age of International
Trade Growth (1945 to the present)
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Four major independent actions by
sovereign nations contributed greatly to the
increase in world trade.
Four major multinational agreements.
The Major Independent Actions
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1. Marshall Plan.
2. U.S. policy toward Asian Nations.
3. Economic liberalization in China and
India.
4. Breakup of the Soviet Union.
1. The Marshall Plan
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After WWII, the victors, led by the U.S., sought to help
create an environment that would gradually reduce
restrictions on trade in practically all countries.
After the war, the U.S. accounted for ½ of the world’s
production.
The Marshall plan (1947-1951), instituted by the U.S.,
extended “credit” for post-war reconstruction and
required borrowing nations to permit free trade.
How the Money Was Spent
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Of the some $13 billion allotted by mid-1951.
$3.4 billion had been spent on imports of raw
materials and semi-manufactured products.
$3.2 billion on food, feed, and fertilizer.
$1.9 billion on machines, vehicles, and equipment.
$1.6 billion on fuel.
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Most of the goods were bought from U.S. firms.
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The Aftermath
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At the end of the period (by 1951) all of the
assisted European nations except for West
Germany had reached their prewar levels of
production.
The free trade policy left the European nations
poised to begin a European economic
unification.
2. U.S. Policy Toward Asia (1)
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The post-World War II decision by the U.S.
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1. to provide aid to Japan’s reconstruction.
2. to help selected Asian nations (South Korea,
Taiwan) by:
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A. transferring technology.
B. allow free imports of goods.
2. U.S. Policy Toward Asia (2)
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In the 1950s, the U. S. brought South Korea and Taiwan
under the anti-communist defense umbrella and began
to buy industrial products from Japan.
Japan’s capacity to export was helped by U.S.
insistence that it be included as a member of GATT.
As a condition for assistance, Japan, Korea and Taiwan
had to develop internal market economies (private
property rights, free enterprise, and a stable money).
Technology Contributions From Asia
(Figure 16-5)
Note: Foreign
patents
account for
about 35% of
all US
patents.
3. Economic Liberalization of
Populous Nations
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Economic liberalization began in Mainland China
in the early 1980s.
Economic liberalization began in India in the late
1990s.
The “freeing of the masses” in these three former
communist or socialist states has had a major
influence on trade in the last decade or so and is
destined to have an even greater impact in the
future.
The Population Map (Figure 16-6)
Explanation of the
Population Map (1)
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The map expands or contracts the size of the
country in accord with its population. Thus the
largest nation in the map is China and the second
largest is India.
Note that the populations of China and India are
substantially larger than those of the U.S. Europe,
Japan, South Korea, Taiwan, and Singapore,
which now is responsible for the vast majority of
the research and development.
Explanation of the
Population Map (2)
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If China and India follow the development
path of South Korea and Taiwan, we can
expect the citizens of these countries to
greatly contribute to future economic
growth. Their GDPs and trade are likely to
exceed the GDPs and trade of the others.
4. Soviet Union Breakup
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Break up of the former Soviet Union in 1991.
Initial effects have been an increase in world trade
involving mostly eastern European nations.
These nations have been admitted to the
European Union and World Trade Organization
(see below).
Others have been slower to follow.
Fate of Soviet Bloc Nations (16-7)
Explanation of Figure 16-7
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The nations closest to Europe have, for the
most part, joined the European Union and
the World Trade Organization (WTO) – see
below.
The nations closest to Russia and Russia
itself are, for the most part, observers at the
WTO and have not yet been admitted.
The Major Trade Agreements
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After World War II, the relatively free nations of
the world gradually moved toward making
agreements and associations that set the
framework for increasing world trade.
Types of decisions:
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Multilateral: many nations agree.
Unilateral decisions: one nation decides.
Bilateral agreements: two nations agree.
Plurilateral: a subset of a multilateral group agrees.
The Major Trade Agreements
 1.
The general agreement on tariffs
and trade.
 2. The European Union.
 3. The north American free trade
agreement.
 4. The Bretton Woods agreement on a
new monetary system.
1. GATT and WTO
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Twenty-three nations in 1949 reached the
General Agreement on Tariff and Trade (GATT).
The nations agreed:
1. To gradually, through a series of expected
future agreements, reduce tariffs and other
international trade barriers. In other words, they
agreed to meet and talk about these things.
2. To develop a means through which nations
could settle disputes over trade without
imposing barriers or threatening war.
GATT Changes into the WTO
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As the years passed,
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1. The barriers to trade became smaller and smaller.
2. More and more nations joined the agreement.
In 1995, the members formed a new
international organization called the World
Trade Organization (WTO).
Duties of the WTO
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1. To help members reach agreements by
arranging for meetings and doing the clerical work
required to record and publish the proceedings.
2. To help members enforce agreements by helping
them resolve disputes.
3. To assist applicants for WTO membership
prepare to meet the qualifications that other nations
require for admission.
4. To educate the public about the reasons for
making the agreements and about trade agreement
history.
The WTO Today
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The WTO not only “administers” agreements
relating to trade in commodities (materials).
Today it also administers agreements to trade in
services and agreements relating to intellectual
property rights.
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http://www.wto.org/
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Who Is Missing From the WTO?
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Of the approximately 194 nations of the
world, 149 are members. Who are absent?
1. North Korea.
2. Religious dictatorships.
3. Nations with insufficient control over the
military or police to enforce agreements.
Who Is Missing
2. European Union: It Starts With
An Economic Community
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European members of GATT formed the
European Economic Community in 1957.
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Members: Belgium, West Germany, Luxembourg, France,
Italy and the Netherlands
Members agreed to eliminate tariffs.
Growth:
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1973: Denmark, Ireland, UK.
1981: Greece.
1986: Spain and Portugal.
EU Is Created and Grows
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By 1992, this had grown into the European Union (EU).
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More growth:
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Members agreed, in principle, to tariff-free trade in goods and
services, freedom of capital movements, and elimination of
barriers to immigration with EU member countries.
1995: Austria, Finland, Sweden.
2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Malta, Poland, Slovakia and Slovenia.
Potential future members: Bulgaria, Romania, Croatia, Turkey
and Macedonia.
Common currency: The euro was instituted in 2002.
The EU Today
EU Expansion
3. North American
Free Trade Association
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The North American Free Trade
Association (NAFTA) was formed in 1994
between the U.S., Mexico, and Canada.
The goal of the agreement is to phase out
practically all tariffs over a fifteen year
period.
Two Peculiar Aspects
of the Agreement
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Because of U.S. dominance, politically
sensitive goods were omitted from the
agreement: dairy products, poultry, eggs,
and sugar.
The U.S. and Canada demanded that
Mexico not be a transshipment point for
goods produced in non-member countries.
Rules of Origin
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The agreement contains rules of origin that were intended to
block Mexico from becoming a transshipment nation for
goods produced in other nations.
A transshipment nation: a nation that imports from one other
nation and the exports to a third nation. The purpose is
ordinarily to evade tariffs or other trade restrictions.
Rules of origin: rules that enable one to determine whether,
for the purpose of the agreement, a good has been produced
in the North American nation that is exporting it.
4. Bretton Woods Monetary
System
The Gold Standard (1)
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The first golden age of international trade took
place under the gold standard. When nations
abided by the rules,
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Each government exchanged gold for its currency at a
fixed rate.
Gold flowed in and out of countries based on their imports
and exports.
Rules of the gold standard:
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Nations that lost gold had to reduce their quantity of
money.
Nations that gained gold had to raise their quantity of
money.
The Gold Standard (2)
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Under the gold standard, the amount of gold held
by the people in a nation was roughly proportional
to its GDP.
The U.S. was growing faster in the late 19th and
early 20th century than other major nations; gold
was flowing in.
After the war broke out in Europe in 1913, gold
flowed into the US and out of Europe faster.
Disruption of the Gold Standard
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During WWI, nations stopped trading and went
off the gold standard.
Afterwards, the gold standard could not be
properly restored. Nations were unwilling to
adjust their exchange rates of gold for their
currency to reflect changes in the distribution of
gold after WWI.
The Situation in 1944
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There was no good international monetary
standard from 1913 to 1944, when the Bretton
Woods meeting took place.
That is a major reason why international trade
had fallen after 1913 (see chart).
GDP/Capita (Figure 16-1)
Bretton Woods Begins
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Named after the place in New Hampshire
where the leaders of different nations
agreed on a proposal that was made
primarily by the US and the UK.
Following WWII, the U.S. had ¾ of the
world’s gold. So it agreed to be the world’s
central banker. It promised to exchange
gold for dollars at a fixed rate.
Overview
Other nations agreed to use dollars as
reserves for their currency.
 They agreed to trade their currencies for
the dollar at a fixed rate.
 The dollar standard was intended to
replace the gold standard of the first
golden age.
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Rules of the Dollar Standard
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1. Nations that lost dollars had to reduce
their quantity of money.
2. Nations that gained dollars had to raise
their quantity of money.
3. The U.S. should exchange gold at a
fixed rate for dollars.
Reversion to the Gold Standard?
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The system could have reverted to a gold standard. As
the economies of Europe and Japan recovered, gold
would have flowed out of the U.S. to those countries.
As dollars were traded for gold in the U.S., the U. S.
would have had to decrease the quantity of money,
which would have caused deflation.
After a time, the dollar standard would have been
replaced by the gold standard.
This did not happen. The system lasted until 1971.
Economic Power Changes and
Keynesian Expansionary Policies
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As other nations recovered from WWII, they grew
faster than the US.
So dollars started to flow out of the U.S.
The US should have reduced its quantity of
money.
In the 1960s, the U.S. began to follow Keynesian
expansionary policy, causing an increase in its
money quantity. It created dollars instead of
reducing them.
U.S. Response to Foreign
Demands for Dollars
As other nations demanded gold, the U.S.
in 1971 refused to give it.
 This refusal destroyed the system that
had been created in Bretton Woods.
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What the U.S. Should
Have Done and Didn’t Do
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Other nations began to demand gold. At first, the US allowed
gold to flow out of the country.
It should have been reducing its money quantity. It did not do
so.
Later it hesitated to allow gold to flow out.
In 1971, the U.S. refused to convert gold into dollars. (It
reneged on its agreement to exchange dollars for gold.)
The system collapsed as other nations left the dollar
standard.
Flexible Exchange Rates
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The system gradually evolved into one of
flexible exchange rates, where the
exchange rate of one nation’s currency in
terms another nation’s is established by the
forces of demand and supply.
After a brief disruption, this system has
gradually stabilized, as most nations have
adopted an inflation targeting monetary
policy.
Consequences of the Growth
in World Trade
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How to measure the consequences
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Growth in US real GDP per capita
Growth in the Human Development Index (HDI):
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The HDI takes account of life expectancy and
literacy.
Growth of population
Growth in US Per Capita GDP
Human Development Index (HDI)
Over Two Centuries

In addition to GDP/capita, the HDI factors in life
expectancy and literacy.
Infant Mortality Over Four Decades
Life Expectancy at Birth
Over Five Decades
Literacy Rates Over Three Decades
Population Growth Over Two Millenia